Tuesday, February 28, 2012

Market Manipulation, Part 1

If the investment advice and forums are any indication, a lot of people consider the markets rigged and manipulated. But what is a good working definition of manipulation? There is price manipulation. That entails the defining what an "artificial" price is. Price manipulation is probably one of those things with a long, long history. One of the most famous cases is that of the Hunt brothers' attempted cornering of the silver market in the late 1970s and early 1980s. Market bubbles may also contribute to "artificial" prices, but bubbles are more of a natural psychological reaction of market participants, not some insidious conspiracy. This difficulty works both ways. Government and industry regulatory organizations cannot be too specific about what signals of fraudulent market activity they are scanning for lest the perpetrators simply work around those signals to escape detection. Besides straight price manipulation, regulatory agencies also consider order flow and spread manipulation.

Johan and Cumming did a study on Market Surveillance regimes around the world in a 2008 paper Global Market Surveillance.

Rosa Abrantes-Metz has written a number of papers on the subject including a 2007 paper Is the Market Being Fooled? An Error-Based Screen for Manipulation.

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